Capital allowances

The Autumn Budget 2026 announced changes to the tax relief available to businesses investing in plant and machinery. The Government will increase the main rate first-year allowance to 50% for qualifying expenditure incurred from 1 January 2027, while reducing the main rate writing-down allowance from 14% to 12% from April 2027. The changes will be legislated for in Finance Bill 2026-27.

The increased first-year allowance will allow businesses to deduct 50% of qualifying expenditure on eligible plant and machinery from their taxable profits in the year the expenditure is incurred. This will provide faster tax relief for businesses making investments in qualifying equipment. The allowance is particularly relevant where other forms of relief, such as the Annual Investment Allowance or full expensing, are not available or are not used. Eligibility conditions and exclusions apply.

The reduction in the writing-down allowance means that businesses using the main rate pool will receive tax relief at a lower annual rate. The main rate pool covers most qualifying plant and machinery, while certain assets, including some integral building features and longer-life equipment, fall into a special rate pool. The main rate writing-down allowance is currently 14% but will fall to 12%. The change will take effect from 1 April 2027 for Corporation Tax and 6 April 2027 for Income Tax. No changes were announced to the special rate which is set to remain at 6%.

The tax treatment of predevelopment costs has been the subject of a recent Supreme Court decision. This is likely to mean that capital allowances will be restricted for some predevelopment costs. The government has consulted on the impact of the decision and whether the current rules could affect investment decisions.

Predevelopment costs are costs incurred in the early stages of a project, before the main development work begins. They can include feasibility studies, surveys, design work, planning and other regulatory approvals and preparatory activities. The amount and type of costs will vary between projects and sectors.

The Supreme Court decision earlier this year established that expenditure must be incurred ‘on the provision of’ plant or machinery to qualify for plant and machinery capital allowances. This means that some predevelopment costs will not qualify. For example, expenditure on securing planning permission would not normally meet this test. Where such expenditure is capital in nature, it may therefore receive no tax deduction.

A HM Treasury consultation was published in July and sought views on the types of predevelopment costs businesses incur and the extent to which uncertainty remains following the Supreme Court decision and the effect of the current rules on investment decisions. The government says it is not currently minded to change the tax treatment of these costs.

Concerns have been raised that this could increase the commercial risk associated with long-term development projects, particularly where substantial costs are incurred before a project proceeds. There have been calls for clearer HMRC guidance on the treatment of historic claims and future tax relief for predevelopment costs.

The government has said that it will publish its response to the consultation in due course. In the meantime, businesses undertaking significant investment projects should review the treatment of their predevelopment expenditure and consider whether costs previously treated as qualifying for capital allowances remain eligible under the current rules.

Businesses investing in qualifying assets may be able to claim the Annual Investment Allowance (AIA) and deduct the full cost of eligible purchases from their profits before tax. This can help by reducing the amount of taxable profit in the period the investment is made.

The AIA can generally be claimed by sole traders, companies and partnerships where all the partners are individuals, on most plant and machinery up to the available allowance. The current AIA limit is £1 million, meaning many businesses can claim immediate relief on significant investments rather than spreading the tax relief over several years.

Qualifying purchases may include items such as machinery, equipment and certain business assets. However, the AIA cannot be claimed on business cars, assets previously owned for another reason before being used in the business or items given to the business.

The allowance is claimed in the accounting period when the asset is bought. Businesses should ensure they use the correct purchase date, which may depend on when contracts are signed or payments become due.

If a business does not want to claim the full amount of AIA, for example because it has low profits, it may choose to claim writing down allowances instead or split the claim between AIA and other capital allowances.

If you have invested in a new commercial building or carried out significant renovation work, you may have overlooked a valuable capital allowance. The Structures and Buildings Allowance (SBA) provides tax relief on qualifying capital expenditure incurred on certain new non-residential structures and buildings.

The SBA applies to qualifying costs incurred when constructing, purchasing or renovating qualifying commercial structures. This can include expenditure on design fees, site preparation, construction works, renovation, conversion and fitting-out costs.

The allowance was introduced in October 2018 at a rate of 2% per year on a straight-line basis. From April 2020, the annual allowance rate increased to 3%, with relief available over a period of 33 and one third years. This rate continues to apply for qualifying expenditure.

To qualify, the structure or building must be used for a qualifying business activity, such as a trade, profession, property business (excluding residential property), or certain other commercial activities. The structure must also meet specific conditions, including having an allowance statement to support the claim.

Claims are made through your tax return, and the relief can generally continue for the full allowance period where the qualifying conditions continue to be met. If you have constructed, purchased or renovated a commercial property since October 2018, it is worth reviewing whether you are claiming all the capital allowances available to you.

The Annual Investment Allowance (AIA) is a valuable tax relief that allows businesses to deduct the full cost of qualifying plant and machinery from their taxable profits. This means that, instead of claiming relief over several years, businesses can often obtain 100% tax relief upfront.

The AIA is currently capped at £1 million per year, and a fresh allowance is available for each accounting period (adjusted if the period is shorter or longer than 12 months).

Most plant and machinery qualifies, including items such as tools, machinery, vans, office equipment, computers and certain building fixtures. However, AIA cannot be claimed on cars, assets previously owned for non-business use or items given to the business.

AIA is available to sole traders, partnerships and companies. However, it is only available to partnerships where all partners are individuals, mixed partnerships that include companies do not qualify.

Timing is important. You can only claim AIA in the period the expenditure is incurred. This is usually the date the contract is signed if payment is due within four months, or the date payment becomes due if later. Special rules apply for hire purchase.

If you do not want to claim the full amount you can claim part of the cost and carry forward the balance using writing down allowances.

Used correctly, AIA can significantly reduce a business’s tax bill, particularly where there is substantial investment in equipment.

The Annual Investment Allowance (AIA) is a generous tax relief that allows for the total amount of qualifying expenditure on plant and machinery to be deducted from pre-tax profits. The maximum amount that can be claimed for the AIA is limited to a £1 million annual cap on qualifying purchases.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to business cars, items you owned for another reason before you started using them in your business or items given to you or your business.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed, if payment is due within 4 months of the contract being signed. If not, the actual payment date if it is due more than 4 months later.

The new 40% First Year Allowance (FYA) for qualifying main-rate plant and machinery expenditure first announced at Autumn Budget 2025 has now come into force.

Effective from 1 January 2026, the new FYA applies to qualifying main-rate plant and machinery expenditure. It was also announced at the recent Autumn Budget 2025 that the main rate writing down allowances would be reduced to 14% (from 18%) from 1 April 2026 for Corporation Tax purposes and from 6 April 2026 for Income Tax purposes.

These changes mean that:

• Businesses can claim a 40% FYA on qualifying main-rate plant and machinery.
• The allowance applies to assets acquired for leasing, which did not qualify from full expensing.
• Unincorporated businesses, including sole traders and partnerships can also benefit from the FYA. These businesses did not benefit from full expensing.
• The allowance is permanent, providing long-term certainty for investment and capital planning.

The new FYA complements the existing full expensing regime, which remains in place for incorporated businesses. Full expensing allows companies to deduct 100% of the cost of qualifying plant and machinery from taxable profits in the year of acquisition, delivering tax savings of up to 25p for every £1 invested, in line with the current Corporation Tax rate.

Understanding how the new 40% FYA interacts with existing allowances, including full expensing and annual investment allowances, will be important when considering expenditure going forward.

Writing-down allowances (WDAs) are a type of capital allowance that let you deduct a percentage of an asset’s value from your taxable profits each year. In some cases, you may be able to claim more relief using other capital allowances, such as the Annual Investment Allowance or first-year allowances.

There are two rates of WDA for plant and machinery. To calculate them, you first group your expenditure into separate pools:

• the main pool – this includes expenditure on most items – the rate is 18%; and
• the special rate pool includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars – the rate is 6%.

Assets are grouped into pools, and WDAs are applied to the balance of each pool after adding new purchases, deducting disposal and accounting for any private use.

The Small Pools Allowance provides an alternative to WDAs. If the balance in the main or special rate pool is £1,000 or less, you can claim the entire amount in one year rather than applying the WDA percentage. The Small Pools Allowance cannot be used for single-asset pools and is prorated for accounting periods shorter or longer than 12 months. You can choose between claiming WDAs or the Small Pools Allowance, where possible, but cannot claim both.

An extension of First-Year Allowances (FYA) for zero-emission cars and charge points was announced as part of the recent Budget measures.

This means that the 100% FYA for qualifying expenditure on zero-emission cars, and electric vehicle (EV) charge points will now be available until 31 March 2027 for Corporation Tax purposes, and until 5 April 2027 for Income Tax purposes. This one-year extension to the current reliefs means that eligible businesses can continue to deduct 100% of the cost of these assets from their taxable profits in the year the expenditure is incurred until the relief expires.

The FYA for cars was introduced from 17 April 2002 for low CO₂-emission vehicles, including electric cars, and was then restricted to zero-emission cars from April 2021. The FYA for electric vehicle charge points was introduced in November 2016. Both of these allowances are intended to support the UK’s move towards cleaner vehicles.

According to HMRC’s figures, this measure is expected to benefit around 13,000 incorporated businesses and 6,000 unincorporated businesses by continuing to offer 100% tax relief in the year the expenditure is incurred for qualifying expenditure on zero-emission cars and EV charge points.

Enterprise zones were first launched in 2011 and are specific geographic areas that provide various tax breaks and government support. Businesses that set-up in enterprise zones can benefit from up to 100% first year capital allowances for qualifying investments in plant and machinery.

This benefit was expected to have ended on 31 March 2020. However, the government announced at Spring Budget 2020, that these capital allowances will remain available for expenditure incurred in relation to all areas, whenever designated, until at least 31 March 2021.

The enterprise zone must also be located within an Assisted Area which is specified within Section 1 Industrial Development Act 1982 or Northern Ireland. The qualifying expenditure must be incurred within a period of 8 years beginning with the date the specific area is treated as having been designated.